Politically Incorrect Thinking For Your Investments

I am Chris Perras, Chief Investment Officer at Oak Harvest Financial Group, we are an investment management and retirement planning advisor located in Houston, Texas. Welcome to our November 12 Stock Talk “keeping you connected to your money”.  

This week we are going to go backwards in time, and we are going to cover some of the material we did in late October 2020.  That was almost exactly a year ago and viewers might remember our country was in the midst of all the political swirl, and non-stop commentary on TV about the dire consequences of the 2020 elections, regardless of outcome.  Regardless of who won the presidency or who won control of Congress

I’m doing this now, because it seems timely with the midterm elections now a year away, and with Jerome Powell’s re-nomination for Federal Reserve Chairmen still a question mark to some.  

I’m doing it to try to show, how little, who is running this country out of Washington DC matters to the overall stock markets, while who is running the Federal Reserve does matter. This week’s title is “Politically Incorrect thinking, for your investments”.

Most of this material is recycled from our Friday, October 30th, 2020, podcast titled, “Waiting No More! This is how early Bull markets look”.  This is not revisionist history.  All of this material is on our website. Here’s what we said back then in front of the election. Reading once again from that script…

“Since mid-August, For the past three months, we have tried to educate our clients and listeners as to the normalcy of pre-presidential election volatility. Well, this focus appears to have been justified as the markets have now pulled back to basically flat year to date with a big jump in realized volatility the past 2 weeks. 

For the past four weeks, we have stressed that this increase in short term volatility is what breeds higher investment return opportunities, if one can control one’s emotions and biases.  That the period of higher implied volatility is when long term investors should be pushing their chips and dollars into the market, not abstaining or fleeing the markets

Well listeners, we are finally here.  It’s time.  It’s time to accelerate investment plans and get more aggressively invested, if you are one to play that tactical asset allocation game.  The next few weeks should continue to stay volatile in the short term.  Why?  I don’t know I can make up reasons like everyone else.  

Factually I think due to states individual procedures, we are unlikely to get an official winner in the election next Tuesday due to the massive early and mail in voting that has occurred.  The experts in voting say that it should take into the weekend to count the totals.  Maybe its contested? We’ve covered history on that topic. On this topic I am a conspiracy theorist in that I do think someone will know relatively quickly, maybe even this weekend, the most likely result will be whether the election count is delayed a few days or not largely due to the early voting.  

The Markets have pulled back to 3275 on the SP500. This is almost exactly where we stood at the end of July, 3 months ago. The convenient excuses being thrown around for the past 2 weeks down move?

The press has gone from parroting a blue wave was good for markets, to 300 points lower on the S&P500 now a “blue wave” in the upcoming election is bad!  I find this flipflopping excuse hilarious.  In the span of 4 weeks, a blue wave went from negative to positive back to a negative event for the markets.  These “fuzzy” reasons are exactly why I like to stick as much as I can to facts, data, and history, as investors tend to replicate the same behaviors cycle after cycle.

I went on to say…

From 3275 the risk reward over the next 15 months is almost 10 to one from here.  How do I arrive at that? There appears to be about 3-4% downside, down to the 200-day moving average of about 3150 on the S&P500 and up 30-40% upside on an optimist outcome of the three major issues of concern being alleviated over the next three to 12 months.  Stock returns look to accelerate along with the real economy the next 5 quarters.  

We went on to discuss the effects on the markets, this cycle, in 2009, 2013, and 2017 during QE, under 180 degrees opposite economic and social policies of President Obama and President Trump.  It didn’t matter who won. In the 15 months following the 2012 and 2016 elections, the markets rallied almost the EXACT same percentage return..38%.

We gave our clients the historic data that the biggest post-election rally over the subsequent 15 months came in.  1932 after the sitting President lost his re-election bid and the entire Congress flipped to the Presidential party…. way back then, after the markets initially fell 4.4% into year end, they then rallied and mind boggling 44.1% over the next 15 months for a net return of? 38% low to high.  

Is this sounding familiar?  Is this sounding “unprecedented”?  No.

Why did the economy and markets behave and work so similarly under totally different presidents with totally different philosophies?  I have One word for you. Stimulus …and its lag effect.

We told all our clients and listeners this back then, we said

“Please do not let the election become an emotional event or crusade, that drives your short-term financial behavior.  It is another event whose outcome we can’t control.   

Fight that feeling to change everything based on next week’s election outcome.  Why?  Because 2021, regardless of who wins next week, is loaded to the gills with that key word I used to describe the post 2012 and post 2016 election economic environments.  What was that word?  Stimulus. 

We already knew the Federal Reserve’s plan for monetary stimulus in 2021 and 2022 and they haven’t even started implementing it yet, we are calling that QE5.  Much like 2012 when they paused before implementing QE3, the fed is waiting until the election has passed.

Lost in the normal pre-election noise, is the bull case for 2021 that the 2020 President, whomever that is, and congress, whomever that is, put job growth and the economy first through additional spending or incentives.  This is in addition to the Federal reserve monetary expansion. We personally may not like how much of our money politicians spend or on what they spend it but regardless of who is elected, they will spend lots of our money, probably trillions in 2021.  

The easy money is made when others are scared or paralyzed, and volatility is high.  It’s always easy in the rear-view mirror.  Don’t let politics cloud your investment judgement.  Stay the course or take advantage of others’ emotions and as warren buffet says, “be greedy when others are fearful”.  This is how early bull markets look.  

That’s what we told clients and listeners, almost exactly 1 year ago in front of the election.  But that is now history..

Which brings me forward to today. We are still in a bull market for equities, albeit having exited the 7th inning stretch. We continue to see and aggressive 4th quarter and early 2021 rally led by large cap technology and growth stocks.  

However, at this time, we do expect a material uptick in realized volatility later in the first quarter of 2022, due to a host of relatively nebulous reasons all centered around the Federal Reserve, its leadership, and its monetary policies throughout the rest of 2022.  You noticed I left out politics and government economic data?  

Clients we will be there for you. Often, worrying in advance about the EXACT same things that are on your minds.

And viewers, feel free to give us a call here at Oak Harvest and ask to speak to an advisor.  Let us help you craft a financial plan that meets your retirement goals. Call us at 281-822-1350; we are here to help you on your financial journey into and throughout your retirement years.

Many blessings, stay safe, and have a great weekend. 

Chris Perras